A broad community of economists has recently rallied to defend Lisa Cook, a member of the board of the US Federal Reserve whom Donald Trump is seeking to remove. More broadly, they have stood for the independence of the central bank. Claudia Goldin (2023 Nobel Prize winner) of Harvard University and David Romer of the University of California, Berkeley, initiated an open letter by signed by economists worldwide. Trump's blows and outbursts against the Fed highlighted the independence of the central bank as a bulwark against attempts by an authoritarian state to seize control over monetary policy. Taking a step back from the concept of central bank independence allows for reflection on the ideology behind it. What is the purpose of central bank independence, and who does it serve?
The first central bank to be made legally independent from the government was the Deutsche Bundesbank, established in 1957. Its strong independence was intended to shield Germany from the inflationary excesses of the past (notably the hyperinflation of 1923). The Bundesbank's governance became a model for the European Central Bank and many other central banks.
Most economists interpret this independence in functional terms: They see it as a prerequisite for the institution tasked with ensuring low and stable inflation to best fulfill that role, free from government interference. Governments tend to be more tolerant of inflation since it lowers the real value of public debt and makes it easier to manage.
The independence of central banks protects against the inflationary bias of governments, especially when they resort to discretionary Keynesian-style stimulus policies. On these grounds, the new classical economists of the 1970s and 1980s (Finn Kydland and Edward Prescott, Robert Barro and Robert Gordon, whose precepts continue to influence macroeconomics textbooks) established the idea that economic policies should no longer be left to government discretion but instead be based on rules and entrusted to independent agencies, thereby making them credible in fulfilling their mandates.
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